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Solar Energy’s Dividend King Comes Through Again

By Travis Hoium - Mar 28, 2017 at 10:45AM

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Another dividend increase from 8point3 Energy Partners sends shares higher.

When 8point3 Energy Partners (CAFD) launched in 2015, it was built to be a dividend stock investors could rely on for the long term. The company primarily buys large, utility-scale solar projects with long-term contracts to sell energy to utilities, and the sun that powers its projects is highly predictable as an energy resource. With First Solar (FSLR 0.73%) and SunPower (SPWR -0.76%) as sponsors, the company was also a little shielded from the shenanigans that nearly brought TerraForm Power Inc (TERP) to its knees. 

But the stock's performance hasn't been what investors had hoped after an IPO at $21 per share. But this week ended on a high note, with an increased dividend and a surging share price. With a 7.9% dividend yield, there's a lot to like about this stock right now. 

A residential solar installation by SunPower.

Image source: SunPower.

The dividend gets a little better

Shares of 8point3 Energy Partners did have a good day Friday, rising 3.6%, after the company announced another dividend increase. The first-quarter 2016 dividend will increase 3% sequentially to $0.2565 per share, in line with what management guided in the last quarterly earnings report. 

Two acquisitions drove the increase in cash to pay out as a dividend:  A 49% stake in the 102 MW Henrietta projects from SunPower and a 34% stake in First Solar's Stateline project. These two projects will contribute $42.9 million in annual cash distributions to 8Point3. As with the company's other projects, there isn't any project-level debt on these projects. 

The 3% dividend increase is lower than a 3.5% quarterly increase the yieldco has maintained since inception, which is due to the inability to buy more growth projects. Depending on how the stock does in the next year, we could see the dividend continue to rise, or it could flatten out, but that's not necessarily bad, given the current yield. 

The dividend king's challenge ahead

If nothing changes at 8point3 Energy Partners, the payout will probably grow at the guided 12% rate (3% per quarter) in 2017 and then stagnate. Yieldcos need to issue equity or debt to fund acquisitions. The cost of capital for those funding sources needs to be below the rate of return on the project to grow cash available for distribution. If the cost of new equity is too high, it doesn't make sense to issue new stock to grow, which is what eventually plagued TerraForm Power's growth. 8point3 Energy Partners has essentially maxed out the leverage it will add by funding projects with just debt, so growth is difficult at the current stock price and yield. 

Utility installation by First Solar shown on a cloudy day.

Image source: First Solar.

However, if the stock comes back in favor with investors and the company can issue shares, we could see more growth in the future. Management hasn't said where that cutoff would be, but the last equity issuance was at $14.65 per share, so they would probably want to see shares trading above that level. The higher shares go, the easier it would be to issue shares and buy accretive projects that will grow the dividend. 

A win-win for investors

Under either scenario, investors can come out winners. One could even argue that the current payout alone over the next 20 years could justify today's stock price. That doesn't give any residual value to solar installations after 20 years, land positions, any dividend growth, or any stock price appreciation. If shares move higher and the yieldco can buy new assets again, we'll see even more dividend growth and probably a higher stock price in the process. 

No matter what happens, 8point3 Energy Partners is set up to be a solid investment for long-term shareholders, and when the worst that can happen is a 7.9% dividend yield from cash flow that's contracted for over 20 years, you must be doing something right. 

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Stocks Mentioned

8point3 Energy Partners LP Stock Quote
8point3 Energy Partners LP
First Solar, Inc. Stock Quote
First Solar, Inc.
$66.72 (0.73%) $0.48
SunPower Corporation Stock Quote
SunPower Corporation
$15.77 (-0.76%) $0.12
TerraForm Power Stock Quote
TerraForm Power

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